Tim Wilson (J.P. Morgan Global Head of Metals Sales - Strategy) presentation at J.P. Morgan China Conference 2009

Premiums for physical material remain high reflecting the tightness of the nearby metals markets, and further stock drawdowns from exchange stocks will spur the markets to higher levels. However the level of finished goods inventories needs to start reflecting the apparent optimism of the production sector, or this rally will fade fast..

The price evolution could be significantly binary – greater confidence , covering of short positions or implied short positions, and this market has the feel of 2006, and could easily trade up 20% even with high apparent stock levels. Lower confidence
and the unwinding of long positions could see this market very quickly retrace to Q1 levels – -20%. In either case volatility will be high and certainty of price direction low.

The conviction of financial players in these markets will remain key. Some have been on the trade, others are late to the game having expected this to be a Q4/Q1 event. In any event the correlation with an equity market recovery and continued positive corporate performance will be high.

Value has returned to the production sector in most metals and with that we will see a longer term commitment to new projects, especially whilst competition is low as availability of capital still limited to a few select players. Price protection of these projects and assets will run at higher levels than has been witnessed over the last 4 years of benign credit conditions.

Consumers, aware of their lack of cover in the last run up, have moved commodity risk to the front and centre of their corporate risk profiles, and will provide liquidity and support to a market within a range of reasonableness. Especially as their revenue lines remain subdued. Exuberance and panic covering have been sidelined for now aware of past poor experiences in other commodity sectors.

A healthy ranging market will evolve , where value is determined by rational business plans, and the degree of participation from producers , consumers and invetsors will increase with every price cycle. Volatility will remain elevated, but liquidity will improve.